Management Notes

Management Notes

Reference Notes for Management
The Sarbanes-Oxley Act of 2002 (SOX) was largely a response to:

The Sarbanes-Oxley Act of 2002 (SOX) was largely a response to:

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The Sarbanes-Oxley Act of 2002 (SOX) was largely a response to:

  1. a series of corporate and accounting frauds involving Enron, Arthur Andersen, WorldCom, and numerous others.
  2. a dramatic rise in the US trade deficit.
  3. charges of excessive compensation to top corporate executives.
  4. rising complaints by investors and security analysts over the financial accounting for stock options.

Answer: a. a series of corporate and accounting frauds involving Enron, Arthur Andersen, WorldCom, and numerous others.

Answer Explanation

The correct answer is (a) A number of corporate and accounting frauds, including Enron, Arthur Andersen, WorldCom, and others. In response to a series of major corporate and accounting scandals that shook investors’ and the public’s confidence in financial reporting and corporate governance, the Sarbanes-Oxley Act of 2002 (SOX) was enacted.

In the early 2000s, several high-profile corporate scandals came to light. Which exposed fraudulent accounting practices, financial mismanagement, and deceptive practices by top executives of prominent companies. Among the most notable cases were Enron, Arthur Andersen (which audited Enron’s financial statements), and WorldCom. As a result of these scandals, Enron and WorldCom collapsed, wiping out billions of dollars in shareholder value and affecting thousands of employees and investors.

Accounting irregularities and corporate misconduct in these companies raised serious questions about the effectiveness of financial reporting, internal controls, and corporate governance. The public’s trust in financial markets and the accounting profession was severely damaged.

As a result of these scandals and to restore investor confidence, the United States Congress passed the Sarbanes-Oxley Act of 2002 on July 30, 2002.

Why the other options are not correct

b. A dramatic rise in the US trade deficit:

The Sarbanes-Oxley Act wasn’t enacted in response to a dramatic increase in US trade deficits. The trade deficit is a macroeconomic concern that is unrelated to the corporate and accounting frauds which led to the enactment of SOX.

c. Charges of excessive compensation to top corporate executives:

Although excessive executive compensation was a concern, it was not the primary reason for the enactment of the Sarbanes-Oxley Act. In order to prevent accounting fraud and restore investor confidence, SOX mainly focused on improving corporate governance, financial reporting, and internal controls.

d. Rising complaints by investors and security analysts over the financial accounting for stock options:

SOX was not primarily intended to address the concern of stock options and their accounting treatment. Although stock options were part of a broader discussion on executive compensation, fraudulent financial reporting and accounting practices were the main impetus for the passage of SOX.

Conclusion

A series of corporate and accounting frauds involving companies such as Enron, Arthur Andersen, WorldCom, and others prompted the Sarbanes-Oxley Act of 2002 (SOX). Investor confidence was severely affected. Questions about the integrity of financial reporting and corporate governance were raised as a result of the scandals. This concern was addressed by SOX, which improved transparency, accountability, and internal controls in public companies. As a result, the act aimed to restore trust in financial markets and protect investors’ interests.

Financial intermediaries          .

Bibisha Shiwakoti
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